What Is a Hardship Loan, and How Can You Get One? (2024)

When you’re facing a financial setback, you may find that you need a bit of extra cash to help you get by.

That’s where a hardship loan comes in. This type of loan can help you through any type of financial hardship, from job loss to medical emergency and beyond.

There are several different types of hardship loans to consider, and each has its pros and cons. However, there are also some hardship loans you should definitely try to avoid, as they can be expensive and predatory.

What Is a Hardship Loan

A hardship loan refers to any type of financing used to get you through a difficult situation.

A hardship loan isn’t necessarily a type of loan but instead refers to why you need the money. Most hardship loans can be used for any purpose, though they’re often used in financial emergencies.

The terms and characteristics of hardship loans vary depending on the type of loan and lender you choose. Some are term loans, while others are revolving credit. Some have low interest rates, while others have notoriously high rates.

Below we’ll talk about some of the types of hardship loans and their characteristics so you can decide which is best for your situation.

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Who Is a Hardship Loan For?

Hardship loans are most often used by people who are going through some sort of financial emergency or setback.

For example, you may need a hardship loan if you’ve recently gone through a medical emergency and need some extra cash to cover your medical bills and any other expenses that popped up as a result.

Hardships could also include expensive vehicle repairs, job loss, emergency medical care, and more.

While a hardship loan can come in handy if you’re unexpectedly unemployed, they’re more difficult to qualify for. Lenders want to see that you have a regular income to repay your loan. You may be able to use unemployment benefits as a source of income on your loan application. Applying with a cosigner may also help you get approved.

Generally speaking, a hardship loan might be right for you if you meet two criteria.

First, you are facing a financial setback and need some extra cash.

Second, — and just as important — you have the ability to repay your loan. If you borrow funds you can’t repay, you’re likely to end up in a much worse position than you’re in now.

5 Types of Hardship Loans

Navigating financial challenges can be overwhelming, and seeking viable solutions is crucial.

In this section, we’ll explore hardship loans, a potential lifeline during tough times.

We’ll discuss what they are, how they work, and the steps you can take to secure one when facing financial difficulties.

Personal Loan

One of the most popular types of hardship loans is a personal loan. A personal loan is an installment loan, meaning you borrow a sum of money upfront and pay it off over a set term (usually between one and five years). Personal loans usually have fixed interest rates and monthly payments.

Personal loans have a few benefits. First, a personal loan can be used for any purpose. And with many lenders to choose from, you can find loans ranging from less than $1,000 to as high as $100,000 for credit profiles ranging from poor to excellent.

You can use a personal loan calculator to see how much your payments would be depending on the amount of loan you need and how long you need to pay it back.

It’s worth noting that personal loans are unsecured, meaning they don’t require any sort of collateral. This is good news since it means you aren’t putting an asset at risk in case you can’t repay your loan. However, because the lender takes on more risk, personal loans tend to have higher interest rates than secured loans.

Home Equity Loan

A home equity loan is a type of installment loan that uses the equity in your home as collateral. Let’s say you have a home worth $300,000 and have $150,000 in equity. You could borrow a home equity loan — also known as a second mortgage — which would reduce your home equity by the amount you borrow.

Like personal loans, home equity loans typically come with fixed interest rates and monthly payments. Terms for these loans are typically much longer — they can be as long as 30 years, just like a regular mortgage.

A key benefit of a home equity loan is that, because it’s secured by your home, it usually has a much lower interest rate. However, because your home is the collateral, if you fail to make your payments, your home equity lender could foreclose on your home.

Cash-Out Refinance

A cash-out refinance is similar to a home equity loan in that it uses the equity you’ve built up in your home as collateral. But instead of taking out a second mortgage on your home, you’re replacing your existing mortgage altogether, but with a larger loan.

Let’s go back to our example above where you have a home worth $300,000 and equity of $150,000, as well as $150,000 left on your mortgage. Instead of taking out a home equity loan, you decide to do a cash-out refinance. But instead of borrowing the same $150,000 you currently owe, you borrow $200,000. $150,000 of the money goes toward paying off your current mortgage, and you’ll get the other $50,000 in cash to do whatever you want with.

Cash-out refinance loans have many of the same pros and cons as home equity loans. They put your home at risk because it’s the collateral for the loan. However, they also come with much lower interest rates than unsecured loans. But keep in mind that the interest rate you get will apply to your entire mortgage. So if you bought a home when interest rates were very low and are refinancing when they’re much higher, you’ll end up paying more for your entire home loan.

401(k) Hardship Loan

The IRS allows workers to borrow money from their 401(k) plans if their employers allow it. You can generally borrow up to the lesser of 50% of your vested balance or $50,000. You’ll have to pay interest on the loan and must repay it within five years with payments at least quarterly.

One benefit of a 401(k) loan is that unlike every other type of loan on our list, you don’t have to qualify for it with your credit score. There’s no credit check, nor does your company or the IRS take your income or debt-to-income ratio (DTI) into account.

These loans have some serious downsides, however. First, once you borrow the money from the account, it’s no longer growing in your 401(k). As a result, you’ll end up with less money at retirement than you otherwise would have.

Another major downside of 401(k) loans is that if you can’t repay them on time, the entire loan counts as an early withdrawal and will be subject to your ordinary income tax rate, as well as an additional 10% penalty. Finally, if you leave your job — whether you quit or are fired — you may have to repay the full balance right away or have it count as an early withdrawal.

Credit Card

While a credit card isn’t technically a loan, it can be used as a substitute for one during a financial hardship. After all, credit cards allow you to borrow money and pay it off relatively slowly. And in many cases, you may find a credit card that allows you to pay 0% in interest for an introductory period that can last anywhere from six months to two years.

Of course, credit cards have some major downsides. First, the best 0% introductory APR credit cards are usually available to borrowers with good credit. So if you don’t have great credit, you may not qualify for this type of offer.

Additionally, credit cards generally have much higher interest rates than the other types of financing on this list. If you only make your minimum payments, you could end up paying thousands of dollars in interest and spending many years paying off the balance you racked up.

Hardship Loans to Avoid

We’ve talked about some of the hardship loans to consider during a financial setback, but there are also some you should definitely avoid due to their high costs and predatory nature.

Payday Loan

The first type of hardship loan you should definitely avoid is a payday loan. As the name suggests, a payday loan is a small, short-term loan (usually for around $500) that is intended to be repaid with your next paycheck.

Payday loans are extremely expensive. According to the Consumer Finance Protection Bureau, a typical APR on a payday loan is around 400%.

And because these rates are so high, many people find themselves stuck in a cycle of borrowing payday again and again. In fact, it’s common practice for lenders to renew payday loans, meaning you pay the interest and fees, and the lender simply starts the clock again for the rest of the balance.

Car Title Loan

A car title loan is another type of predatory loan that requires handing over your car’s title as collateral on the loan. Like payday loans, car title loans are generally small loans that must be repaid within about 30 days. And also like payday loans, car title loans have APRs in the hundreds — a typical APR would be about 300%.

If you can’t repay your loan, you may be able to renew it for another 30 days. However, because the loan uses your car as collateral, the lender can repossess your car if you fail to pay your loan off on time. And as you can imagine, this puts you in a much worse financial situation than you were already in.

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